Shakeout in old media picks up pace

Feb. 24, 2013
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Issues of People magazine are displayed next to a Sports Illustrated ad on a New York City newsstand earlier this month. Time is in talks to sell most of its magazine group, including People and Entertainment Weekly, to the Meredith Corp. However, it is expected to retain control of flagship titles Time, Sports Illustrated and Fortune. / Mario Tama, Getty Images

by Roger Yu, USA TODAY

by Roger Yu, USA TODAY

On Feb. 6, Time Warner CEO Jeffrey Bewkes spoke at length about his company's performance in a routine earnings call. He went on about CNN's election coverage, the enduring popularity of HBO - and even the impact that the absence of any new Harry Potter movies has had on Warner Bros. movie studio.

That its print business is on Bewkes' back-back burner was hardly a surprise. But the 2,400-word speech didn't refer to any of its magazines, once the crown jewels of its publishing empire.

Its print division Time Inc. - which includes Time, People, Sports Illustrated, Fortune, InStyle and other magazines - received a single, cursory nod, a 50-word blip about how the division is making more tablet apps.

So the stock market merely shrugged when word leaked a week later that most of Time Inc.'s magazines likely will be sold to Meredith, a smaller publisher in Des Moines. Time Warner's stock is trading about 4% higher than it was a month ago.

With the financial market ripe for deals, Time Warner is one of several large media companies looking to sell or restructure their print divisions. Investors have been selling their stakes in media companies for some time as print revenue declined over the past decade. But the quickening pace of deals in recent months indicates that a new order is emerging in the media world - one in which shareholders demand greater focus from companies with hands in too many unrelated jars.

Companies are moving to quarantine their more profitable units from the fallout of print advertising's decline. And vulnerable print businesses increasingly are left to survive on their own merits, with a hope that their executives, no longer distracted by other divisions, will provide more resources and navigate the digital transformation with stepped-up vigor.

Last year, total U.S. digital advertising spending reached $37.3 billion, exceeding spending on print ads for the first time, according to research firm eMarketer. That only adds to media companies' urgency to chart out their digital future with a clearer strategy, says Ken Doctor, a media analyst who writes about the industry on his site, Newsonomics.com.

"The 2000s was a period when (print media companies) sobered up to the fact that digital disruption is changing business models," Doctor says. "This time, it's the great (digital) crossover. ... Some want to go on the journey. Some are saying 'I don't want to cross that river.'"

Several deals have surfaced in recent months that could reshape four of the 10 largest newspapers, some of the most popular and profitable magazine titles and a giant in the education publishing market:

â?¢ News Corp. revealed in December the details of its planned spinoff of its print division - which includes The Wall Street Journal, the New York Post and several British papers - into a separate company that will retain the current corporate name. The spinoff is underway and will be completed later this year.

Rupert Murdoch, CEO of News Corp., will be chairman of the new company. Robert Thomson, former managing editor of the Journal, will be CEO. Perhaps in a move that underscores the priority of even this newspaperman-at-heart, Murdoch will remain both the chairman and CEO of the more profitable TV and film business left standing, which will be renamed Fox Group.

â?¢ Time Warner is in talks to sell most of its magazine titles, including People, InStyle and Real Simple - to Meredith, which wants to expand its portfolio that targets mostly women.

For now, Time Warner plans to keep at least Time, Sports Illustrated and Fortune. But even they will likely be sold in the future, says Reed Phillips, co-founder of DeSilva + Phillips, an investment bank specializing in the media industry. "If Time Warner is selling such a large portion of its (magazine business), there's even less of a reason to be in the business going forward," he says.

With a decline in advertising sales and subscriptions, revenue for Time Warner's publishing business, Time Inc., fell 7% to $3.4 billion last year.

â?¢ Tribune Co., whose properties include the Los Angeles Times and the Chicago Tribune, emerged from a painful four-year bankruptcy reorganization last December and is looking to sell some or all of its eight newspapers, according to Bloomberg News.

Analysts expect the company to then focus on the 23 TV stations that it owns around the country.

â?¢ New York Times Co. is shedding its exposure to the print business further by selling The Boston Globe and doubling down on its flagship paper, which has greater international appeal. In announcing the sale of the 23rd largest metro daily last week, CEO Mark Thompson said the move was orchestrated "to concentrate our strategic focus and investment on The New York Times brand and its journalism."

In 2011, the company also sold its regional newspaper unit - which consisted of 16 newspapers, including The Gainesville Sun and the Sarasota Herald-Tribune in Florida - to Halifax Media Holdings for $143 million.

â?¢ McGraw-Hill agreed in December to sell its education business, the second-largest college book publisher, whose sales had declined the past two years, to private equity firm Apollo Global Management for $2.5 billion.

Even though the education unit generated more than $2 billion in revenue last year, McGraw-Hill came under pressure from shareholders to unlock its stock price potential by focusing just on its business-information units, which include ratings firm Standard & Poor's.

Favorable market conditions

Until about 18 months ago, there was little appetite in the media industry for deals and acquisitions as bearish investors, skittish about the sluggish economy, stayed on the sidelines.

But with looser financial markets, attitudes are shifting. According to data from Thomson Reuters, about $21 billion in "media and entertainment" deals have cropped up since the beginning of the year.

Low interest rates have made the debt market livelier. Surging cash piles from companies that have been idle in the past few years also encourage more deal-making. Companies in the Standard & Poor's 500 are on pace to have $1.06 trillion in cash, setting a record. "Companies are flush with cash and looking to put money to work," says Richard Peterson of S&P Capital IQ. "You have buyers looking to acquire targets."

Investors are also heartened by the improving - albeit slowly - conditions of the news businesses, particularly newspapers. U.S. newspapers have lost about a fifth of their revenue since 2009, and their valuations have reflected the decline, Doctor says.

But the rate of decline in advertising revenue now can largely be matched by cost cutting. This additional bit of certainty - along with rock-bottom prices of newspapers - is convincing investors to reconsider buying papers. "Newspapers still remain profitable if they keep on cutting cost," Doctor says. "If you want to put a media property on the market, it's a better time to do it now than three or four years ago."

Also driving the optimism is more evidence of readers' willingness to pay for content. The Journal, the Times, The Financial Times and local newspapers published by Gannett all feature a paywall. (Gannett is the parent company of USA TODAY.)

Vocal shareholders are also pressuring media companies to raise stock prices by unleashing money-losing divisions. They want protection from the risk that the transition to digital platforms will result in a decline in profits.

McGraw-Hill's sale of its education division was partly driven by several shareholders - including activist hedge fund Jana Partners and the Ontario Teachers' Pension Plan - calling for a major restructuring.

"Shareholders want to see more focused companies," Phillips says.

But there can be an upside for print units, too. They may have been disadvantaged by being a part of a combined company because resources in a conglomerate are often steered to ventures with better growth potential, Phillips says. Once spun off, "They can now focus on what they do best," he says. "I don't think the concept is 'Let's put the good business over here and bad business there.' They're different businesses, and the market is valuing diversified businesses differently than 10 years ago."

Even prior to its announcement, shareholders of News Corp. talked about splitting the publishing business, only to have Murdoch initially resist such moves. Its publishing business contributes about a quarter of its revenue but only about 10% of its profit, Doctor says.

Pressure to split the company escalated in the wake of a phone-hacking scandal involving one of News Corp.'s U.K. newspapers, which eventually closed. But that gave investors yet another reason to renew their call for a split.

Rick Edmonds, a media analyst at Poynter Institute, notes that News Corp.'s plans have precedence. Two smaller companies - E.W. Scripps and Belo - also spun off their newspaper businesses in 2007 and 2008 respectively. And the newly created publishing companies emerged without burdensome debt on their books, he says.

Brighter prospects for smaller papers

In assessing print publications' future, the conventional wisdom is that newspapers in smaller markets - with less competition for audience and advertisers - have brighter prospects to sustain growth. Warren Buffet's purchase of more than 60 small papers - including the Omaha World-Herald and The Richmond Times-Dispatch - has only reaffirmed that view.

Analysts are less sanguine about the future of large dailies, even as more are put up for sale.

Civic or political-minded individuals with deep pockets are seen as their most likely saviors. Facebook co-founder Chris Hughes' purchase of The New Republic is a prime example. According to the Times, New York Mayor Michael Bloomberg is interested in buying the Financial Times, which is owned by Pearson.

Austin Beutner, an investment banker who ran in Los Angeles' mayoral race last year, is rumored to be interested in buying the Los Angeles Times, joining Rupert Murdoch on a list of potential bidders.

But then you have financial buyers, as well. Aaron Kushner is a prime example. He bought Freedom Communications, publisher of the Orange County Register, in June 2012 for an undisclosed sum and has industry watchers' attention by actually adding news pages and hiring journalists.

"We're starting to see as we give the community more, they are engaging more with us and spending more money with us," he told USA TODAY earlier this year. Both circulation and ad revenue are up, he says.

Kushner likely enjoyed the low valuation the newspapers are fetching nowadays. Ten years ago, at their peak, the price of buying a newspaper was worth about 10 to 12 times its annual cash flow, Doctor says. Now, it's about three to five times, he says.

In selling the Globe, the New York Times Co. likely will get a fraction of the $1.1 billion it paid in 1993. The Globe - and other related assets also on the block - is worth about $150 million to $180 million, estimates Kannan Venkateshwar, an analyst with Barclays Research.

The prospect for national magazines may be even bleaker. Fewer than 5% of national magazines' overall advertising revenue comes from digital ads, vs. 20% for some high-performing newspapers, Doctor says.

Time Warner hired Laura Lang as CEO of Time Inc. in late 2011 with the mission of reassessing its print future, and the result seems clear: The company is paving a future without most of its magazine titles.

The impact on customers is still unclear. But one things seems to be sure: Readers will have to pay more for quality content.